Will the new budget ease VAT worries?

Finance Minister AMA Muhith’s budget proposal for the 2017-18 fiscal year has both consumers and businessmen on edge over a long-anticipated – and long-debated- flat VAT provision. The Tk400,266-crore budget will focus on increasing revenue collection through VAT, which is going to be a flat 15% according to the Value-Added Tax (VAT) and Supplementary Duty Act, 2012 – due to become effective July 1. However, speaking at different forums in the last few weeks, Muhith has hinted at relaxing the VAT rate. But will the new budget end up pacifying people with reduced VAT rate, or will it stay 15% causing more pressure on consumers? People with lower incomes and small business owners are already worried that the new VAT law will push up their cost of living. Product prices will go up everywhere, said a clothing brand executive at Bashundhara City Shopping Mall in Dhaka. “At present, a customer has to pay 4% VAT at our shop – Tk1,040 for a Tk1,000 product. With 15% VAT, a customer will have to pay Tk1,150 for a Tk1,000 product,” he told the Dhaka Tribune, declining to give his name. “My salary has not increased in the last two years, but the government has increased gas and electricity prices. Following the government, my landlord has increased the rent as well,” said Mohammad Mehedi Hasan, an employee in the private-sector. The 15% VAT is bound to hike the prices of daily commodities and raise living costs, he said. “As a citizen, I am worried. It seems the government is going to take more from us without giving back as much. What benefits are we getting as citizens, when we live with load-shedding, polluted water and broken roads every day?” he asked. The government has however indicated that essential commodities, education and life-saving drugs would be exempted from the VAT. Last week, Muhith said the new VAT law would not affect the prices of daily essentials. But several business owners said they could hardly rely on these reassurances when Muhith is set to propose a revenue target of Tk87,887 crore through the collection of VAT, supplementary duty and other duties – more than double the amount that the government earned in the first eight months of the current fiscal year (Tk38,671.05 crore) and nearly two-thirds more than the earnings in the last fiscal year (Tk55,446.68 crore). The new law does have a provision for VAT rebates for manufacturers as they can claim a refund of VAT that they pay on raw materials. But experts say the process is both cumbersome and costly – the manufacturers will have to maintain books and keep records of every transaction. “The rebate will go to the manufacturers’ pocket; it will not help the consumers,” said AB Mirza Azizul Islam, former finance adviser to the caretaker government. He suggested reducing the VAT rate to 10%, considering the per-capita income, since most countries in South and Southeast Asia have VAT rates below 15%. The standard VAT rate is 8% in Iran, 12.5% in India (but varying between states), 13% in Nepal, 12% in Sri Lanka, 6% in Malaysia, 7% in Singapore, 10% in Indonesia, 5% in Nigeria and 12% in the Philippines.